Making Money

If I say, “Rowan’s a school teacher – he makes $50,000 a year,” you have a pretty good sense of what I mean. Every couple of weeks, Rowan gets a paycheck, less whatever taxes he owes. At the end of the year, he’ll get a Form W-2 from the school district, and the “Gross Pay” line will read $50,000. Obviously, Rowan’s total take-home pay will be some amount less than that, but he “made” $50 grand, and that’s what he’ll be taxed on.

But now if I tell you, “Lydia owns a laundromat – it made $250,000 last year,” there’s a good chance you’ll interpret that differently. When we’re talking about the amount of money a business “makes,” we often mean how much revenue it brought in, not how much profit it cleared. The government doesn’t tax raw revenues, it taxes profits. So our picture is incomplete. Lydia’s company may have taken in $250K, but her payroll, rent, and expenses might have totaled $200K. If her net profit is $50,000, then that’s the amount she’ll get taxed on, much like Rowan’s schoolteacher salary.

This is all very elementary, but when it comes to businesses, revenues regularly get confused with profits. Even Barack Obama did it, in his infamous conversation with Joe the Plumber. Samuel Wurzelbacher made the following claim:

I’m getting ready to buy a company that makes 250 to 280 thousand dollars a year. Your new tax plan’s going to tax me more, isn’t it?

For some reason, Obama got mixed up and described his own tax plan incorrectly:

If your revenue is above 250, then from 250 down, your taxes are going to stay the same. It is true that, say for 250 up — from 250 to 300 or so, so for that additional amount, you’d go from 36 to 39 percent, which is what it was under Bill Clinton.

Obama meant to say profit, not revenue. And Joe the Plumber was most undoubtedly nowhere near buying a company with $250,000 in profits. That would have meant $250K left over after paying for all salaries, expenses, equipment, insurance, and more. Based on standard valuations, such a company would have sold for a few million dollars, and that’s because a $250,000 profit for a small, individually-owned company means you’re doing damn well.

It’s super-simple, really. Imagine if Rowan instead earned a $250,000-a-year salary from his employer (maybe he became an executive at Halliburton). Could anyone deny he was very well off? He’d be in the top 2% of earners in this nation. Of course, there are some people who are vastly richer, and make Rowan look like small potatoes in comparison. But regardless, Rowan would be very fortunate, and, in the end, winding up with a lot more money in his bank account than Lydia.

Remember this when dangerous underminers like Jared Polis try to demagogue the issue. Only four percent of all small businesses would have been subject to the new revenue-raising measures proposed by the House Ways & Means committee to help pay for healthcare reform. (And most “small businesses” don’t even employ anyone – the definition takes it all manner of entities.) Nancy Pelosi is even saying now that she wants any new taxes to only affect individuals earning $500,000 or more, which of course would hit an even tinier number of small businesses.

So when we’re talking about small businesses that might have to pay a little bit more in taxes so that we can make sure everyone in this country has health insurance, we aren’t talking about Lydia’s humble laundromat, hustling to scrape in a million quarters a year but netting just $50,000 before taxes. We’re talking companies which make several times what Joe the Plumber’s hypothetical but very profitable small enterprise would have made – companies which can, in other words, afford it.

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